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WebcastSlides Spinning Out and Splitting Off Oct 30 2018
WebcastSlides Spinning Out and Splitting Off Oct 30 2018
Michael Collins
Andrew Fabens
Stephen Glover
Beth Ising
Saee Muzumdar
Daniel Zygielbaum
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Agenda for Today’s Webinar
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Overview of Spin-Off
Transactions
Why a Spin-Off?
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Separation Alternatives
Subsidiary IPO /
Spin-Off Sponsored Spin
Spin
Steps: Steps: Steps:
Parent transfers target business into stand- Parent transfers target business into stand- Similar to Spin-Off, but financial
alone subsidiary (“SpinCo”) alone subsidiary (“NewCo”) sponsor invests in SpinCo
contemporaneously with the Spin
Parent distributes SpinCo stock to stockholders NewCo completes initial public offering,
of Parent as of the record date for the spin-off which may include secondary sale of a Introduces a third party into the
portion of Parent’s interest and/or primary negotiation
Note: in split-off alternative, Parent
offering
stockholders may exchange, on a pro rata Provides cash to Parent in
or non-pro rata basis, Parent shares for Provides cash to Parent in connection connection with separation
SpinCo shares (typically at a discount to with separation
Tax:
market to incentivize holders to tender into
Parent’s remaining interest in NewCo is
exchange) Generally tax-free to both Parent
subsequently spun-off or split-off to complete
and stockholder of Parent if
SpinCo is operated as a separate, publicly separation
requirements of IRC Section 355
traded company
Tax: are met
Tax:
Parent must retain 80% voting control in IPO Proceeds from sponsor investment
Tax-free to both Parent and stockholder of in order to ensure subsequent spin/split will Parent generally tax free
Parent if requirements of IRC Section 355 are be tax free
Timing:
met
Timing:
Similar to Spin-Off
Approvals:
12 months+ following initial filing
Parent stockholder approval is not typically
required
Timing:
Generally 6-12 months following initial filing
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Split-Off Transactions
• Parent conducts an exchange offer in which it offers its stockholders the opportunity to exchange some
or all of their Parent stock for SpinCo stock
• The split-off exchange offer is typically conducted following the sale of a portion of SpinCo to outside
investors, whether to a sponsor or to the public in an IPO
• Once established, the trading value of SpinCo shares is used to determine the split-off exchange
Transaction ratio
Structure • In a split-off transaction, the stock of SpinCo is acquired only by Parent stockholders that elect to
participate in the exchange offer
• Upon completion, some stockholders may hold only Parent stock, while others may hold only
SpinCo stock, while others may hold both
• Parent may retain stock in the split-off company; to effect complete separation, Parent will need to
dispose of remaining SpinCo stock through a subsequent pro rata dividend distribution to all holders
or through a marketed offering to third parties
• The split-off exchange reduces the number of shares of Parent stock outstanding, effectively
functioning as a stock buyback
• The post split-off stockholder base may be more stable following the transaction as compared to spin-
Advantages off
• Stockholders will have elected to acquire SpinCo stock and chosen to become investors in SpinCo
• By contrast, stockholders are initially forced to be investors in both RemainCo and SpinCo in the
spin-off context
• In a traditional spin off, stockholder base can be particularly susceptible to rapid turnover if SpinCo
is not eligible to be included in same index (e.g. S&P 500) as Parent and tracking funds must exit
positions; split off structure mitigates this issue because stockholders choose before receiving
shares.
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Spin-Off: Transaction Steps
Stockholders
of Parent * Step 1 assumes that the assets and
liabilities of the business to be spun off are
not held in a subsidiary of Parent. This step
is not necessary if the business to be spun
off is already held in a subsidiary of Parent.
Parent
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Spin-Off: Transaction Steps (cont’d)
Stockholders
of Parent
Parent SpinCo
Spin-Off: Dividend
distribution to all Parent
stockholders
OR
Split-Off: Exchange Offer
open to all Parent
stockholders
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Spin-Off: Transaction Steps (cont’d)
Remaining Assets
and Liabilities
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Illustrative Timeline of Spin-Off Transaction
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Key Separation Issues
Key Separation Considerations
Business considerations
• Establish business purpose of spin-off
• Define the scope of the businesses, assets and liabilities (including any “shared” assets and liabilities) to be separated
• Identify any commercial, indemnification and other arrangements expected to continue between the separated businesses
post-spin, including ongoing shared services (legal, financial, HR, etc.)
Transaction structure
• Spin-off can be coupled with a variety of monetization and recapitalization techniques
• Assess transaction alternatives and attendant costs/risks
• Indebtedness covenant analysis
• Does the spin-off amount to a transfer of “all or substantially all” assets for purposes of Parent debt obligations
• Impact on existing material contracts
• Assignment/change of control analysis
• Parent guarantees, including government guarantees
• Consider need for regulatory approvals, especially in foreign jurisdictions
Viability of each entity
• Fraudulent conveyance
• Transfer of assets and liabilities to SpinCo is generally not for reasonably equivalent value
• Transfers may be voidable if Parent and SpinCo do not meet solvency/capital requirements following the transfer
• Consider obtaining solvency opinion with respect to Parent and SpinCo post-spin
• SpinCo needs adequate resources and infrastructure to bridge transition to independence
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Separation of Assets and Liabilities
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Key Separation Considerations (cont’d)
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Key Separation Considerations (cont’d)
SpinCo Controls
• Need to determine if SpinCo has necessary internal controls over financial reporting, as well as disclosure controls and
procedures, to produce financial statements and reports required of reporting companies
• SpinCo may need to upgrade its systems, including purchasing computer hardware and software and hiring additional
personnel for finance, accounting, information technology and legal staff
Listing on an Exchange
• Need to determine if SpinCo will meet initial listing requirements
• Need to determine if Parent will meet continued listing requirements following the spin-off
• Requirements include total shareholders, per share price, number of market makers and market value of public float
Employee Matters
• Allocate management and human resources between Parent and SpinCo
• Benefits and compensation issues
• Determine treatment of equity awards in the spin-off
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Role of the Board
The role of the Parent board of directors in connection with a spin-off includes:
Approve material agreements and other legal documentation
Board Action
Required Approve any pre-spin internal reorganization transactions
Appoint initial public SpinCo board and senior management
• Appointment of independent directors is typically not effective until the spin-off
is completed
Declare dividend of SpinCo stock to Parent stockholders
Directors need to be mindful of their fiduciary duties in approving the spin-off transactions,
as follows:
Duty of Care: directors should fully inform themselves of all material information
that is reasonably available and act as reasonably prudent persons in similar
situations would act
Director Fiduciary
Duties Duty of Loyalty: directors must act in good faith in the honest belief that their
decision is in the best interests of Parent stockholders, and their decision must not
be motivated by self-interest
Parent board’s fiduciary duties are owed to Parent stockholders (not to the future
stockholders of SpinCo)
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Role of the Board
Under Delaware law, a corporation may pay dividends out of its “surplus” or net profits for
the current or prior year
• Parent board must conclude that the value of SpinCo stock to be dividended out does
not exceed Parent’s surplus or net profits for the current or prior year
Directors may be held personally liable under Delaware law for negligence in connection
Liability for Unlawful with a dividend not lawfully paid from available funds
Dividends Directors are protected from liability for unlawful dividends made in reliance on reports of
officers, employees, board committees or experts
• Parent board should review evidence provided by Parent management with respect to
surplus, and may obtain analyses/appraisals from experts to determine adequacy of
surplus
• Board should also receive viability analysis from chief financial officer of Parent with
respect to each of Parent’s and SpinCo’s ability to finance its anticipated operations
and capital requirements following the spin-off
• Board should also obtain a solvency opinion from a valuation firm
In evaluating a spin-off, the Board must obtain a full picture of the value-increasing potential of the
transaction as well as the attendant costs and risks, in each case weighed against transaction
alternatives, including the alternative of maintaining the status quo.
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Major Documents - Contracts
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Tax Planning
Recent Tax Developments
General Background
• Must comply with various technical requirements in Internal Revenue Code and Treasury
Regulations to be tax-free.
• Taxpayers often seek IRS private letter rulings on spin-offs.
• IRS periodically issues guidance on ruling practice, including:
• Procedures for seeking rulings.
• Issues on which it will rule.
• Issues on which it will not rule.
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Recent Tax Developments
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Recent Tax Developments
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Recent Tax Developments
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Recent Tax Developments
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Recent Tax Developments
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Capital Markets Matters
Major Documents - Other
Securities Documents
• Form 10 / Information Statement
• For the registration of SpinCo shares distributed to Parent stockholders
• Disclosure is contained in an "Information Statement" filed as exhibit
• Similar to disclosure that would be required in a registration statement for an initial public offering under the Securities
Act – Parent 10-K and Proxy can serve as template for information statement
• Once final, the Information Statement will be printed and mailed to Parent stockholders
• Form S-8 for SpinCo equity plans
• NYSE/NASDAQ Listing Application for SpinCo shares
Financing Documents
• New notes and other debt agreements for SpinCo, as applicable
Opinions
• Parent does not typically receive a legal opinion with respect to the spin-off
• Parent may receive a solvency opinion (an opinion that Parent will be solvent after giving effect to the spin-off) in order to insure
legality of the stock dividend under state law
• Tax opinions
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SEC Registration and Review Process
SEC Review
The SEC process is similar in scope and complexity to an IPO. The registration statement can be submitted confidentially to the SEC to
minimize public scrutiny during the review process. SEC comments are expected 30 days after filing. Recent policy changes at the SEC
have led to a reduction in the number of comments and greater efficiency in the iterative review process.
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Preparing to be Public
Goal: Position business to be well received and perform positively over the long
term
Product: Preparation of key registration document requires collaboration
between management, many parts of the business, bankers and counsel
Preliminary structuring matters
Prepare audited standalone financials and pro-formas
Debt and finance arrangements
Board composition and corporate governance
Develop investor relations messaging
Process: Multiple workstreams proceeding concurrently and touching all parts of
the company
Private Acquisitions 30
Notes on the Process
Private Acquisitions 31
Separation Debt Financing – Overview
In connection with the separation, debt capital structure of SpinCo must be established; pay down or “transfer” of Parent debt
rebalances debt load between Parent and SpinCo
Debt capitalization typically completed prior to separation
Considerations
• Timing
• Registered vs. unregistered offering
• Form of the transaction(s)
• Leveraging Form 10 process and documentation for the debt offering
• Special terms of the debt
The debt financing can be completed through either a registered or an unregistered offering
Registered Offering
• Offering made on Form S-1 and/or Form S-4
• Offering documents publicly filed and subject to completion of SEC review
• Subject to form requirements parallel to those required for the Form 10
Unregistered Offering
• Made in reliance on Rule 144A and Regulation S via confidential offering memorandum
• Offering documents not publicly filed or subject to SEC review
• Offering can be completed prior to launch of IPO
• Fewer technical requirements governing contents of the offering documents
• Sales limited to institutional investors that are qualified institutional buyers or non-U.S. persons
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Separation Debt Financing – Details
In an offering prior to completion of the separation, bond purchasers may expect certain special
provisions, including:
Parent guarantee of the bonds, which is automatically and unconditionally released upon completion of the
Spin
Special Mandatory Redemption in the event the Spin is not completed by specified date
• Typically a 1% premium paid at redemption
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Separation Debt Financing – Form of the Transaction(s)
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Employment and Benefits
Plans
Retirement Plans
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Equity Awards
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Other Key Considerations
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Corporate Governance
Corporate Governance Considerations
Governance Structure
• (Re)consider state of incorporation?
• Constituent documents must be appropriate for a public company
• Rather than replicating Parent’s governance structure, consider SpinCo’s
unique stance as a newly public company SpinCo’s
structure and
• SpinCo is likely to be smaller and potentially more vulnerable to governance
activists must reflect, like
Parent, a fully
• Easier to adopt takeover preparedness measures such as classified independent,
board and rights plan while SpinCo is still a Parent subsidiary operational
public company;
• But consider the reaction of SpinCo’s shareholder base
but there is also
• Initial vs. later impact of large institutional investors and proxy advisory an opportunity
firms for a
“fresh start.”
• Parent’s history with takeover defenses may be instructive
• Key timing considerations
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Corporate Governance Considerations (cont’d)
Directors
• Board composition
• Generally desirable to choose individuals with knowledge of the business being spun off
• Stock exchange requirements regarding independence of board and committee members
• SpinCo will have a one-year grace period to comply
• If Parent owns over half of SpinCo’s voting power after the spin-off, it will be a “controlled company” and
subject to fewer stock exchange director independence requirements
• Corporate opportunities doctrine - Issues will arise if Parent and SpinCo businesses
overlap. Consider addressing fiduciaries’ obligations to present different categories of opportunities
to each company in separation agreement and governing documents
• Board committees
• Independent audit, compensation and nominating committees required
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Corporate Governance Considerations (cont’d)
Other Considerations
• Related party transactions
• Intra-company transactions may become related party transactions post-spin
• Pre-spin director preparation/compensation
• Post-spin board “ramp up” needed pre-spin
• Related compensation questions
• Post-spin board schedule
• Build in advance to maximize post-spin participation (and avoid attendance disclosure)
• Scheduling the first annual meeting of shareholders
• Not immune from shareholder proposals in year 1
• Consider Parent’s shareholder proposal history
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Intellectual Property Issues
Inventory and Allocation of IP in Spin-Out
Inventory
Allocation Retained IP
Shared IP Shared IP
Transferred IP
(Licensed) (Grant-back)
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Key Terms for Shared IP
Key Terms
Term of Exclusive /
Field of Use Assignability Sublicensable Enforceability Address Key Terms
License Non-Exclusive
for each Type of IP -
balancing a
successful spin-out
with retaining value
for parent
Type of IP
Less
negotiated
Occasionally
negotiated
Often
negotiated
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Software Licenses
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Transition Services – TSA
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Thank you for joining us!
Daniel Angel
Partner, New York
dangel@gibsondunn.com
TEL: +1 212.351.2329
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